The UK's inflation rate unexpectedly tumbled to 3.9% in November, marking the lowest level since September 2021 and offering a glimmer of hope for households grappling with the cost-of-living crisis.
However, economists have warned the seemingly positive news masks deeper concerns about the economy's fragile health.
The year-on-year rise in the consumer prices index (CPI) was significantly lower than the 4.4% predicted by economists and a welcome drop from October's 4.6%. Falling prices in food, fuel, and recreation sectors drove this decline.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: "Comparative to last year, there has recently been a sense of cautious optimism in the air, and this morning's inflation figure of 3.9% adds to this.
"The Bank of England now certainly faces a less daunting task in steering inflation back to its 2% target next year, without necessitating a deep recession."
However, Carter cautioned that the broader economic picture remains worrisome. He said: "Despite the encouraging inflation data, the UK economy is plagued by stagnation and subdued growth prospects."
Carter pointed to the recent 0.3% GDP contraction between September and October and the ongoing struggles of key sectors such as IT, financial services, and retail.
The pressures on households remain immense, with soaring food prices eroding the purchasing power of even modestly rising wages. Additionally, record-high rental growth and ongoing mortgage pressures are adding to the financial strain.
Carter observed early signs of a potential rebound despite these challenges, stating: "Wages are finally outpacing inflation, consumer confidence is showing signs of recovery, and the inflation drop is a significant step forward."
The BoE now faces a delicate balancing act. While the lower inflation data strengthens the case for cutting interest rates, policymakers are wary of premature action. The central bank remains concerned about persistent services inflation and wants to see more concrete evidence of sustained wage growth before easing monetary policy.
Markets, however, are already betting on rate cuts. Following the inflation release, traders fully priced in a quarter-point cut for May 2024 and assigned a 50% probability for a similar move in March.
Chancellor Jeremy Hunt welcomed the inflation drop, noting that “we are starting to remove inflationary pressures from the economy”. However, he acknowledged the need for continued vigilance and pledged to "build a high-growth, high-wage economy that works for everyone”.